Litigation: It’s the little things that make a difference

When we think of Foreign Corrupt Practice Act (FCPA) enforcement, what comes to mind are the nearly monthly headlines about multi-million dollar criminal settlements resulting from hundreds of thousands or millions of dollars in bribes to foreign officials. But in-house counsel know that the devil is in the details. It’s the less-publicized, less-spectacular questions relating to facilitation payments and expenses for gifts and hospitality that keep in-house counsel at even the most anti-bribery compliant companies scrutinizing their expenditures.

Recognizing the increasing globalization of industry and the breadth of extraterritorial application of the FCPA and the UK Bribery Act, this article examines the treatment of facilitation payments and gift and hospitality expenses under both anti-bribery schemes.

Facilitation payments under the FCPA

The FCPA explicitly provides an exception to the bribery prohibition for “facilitating payments” for necessary or “routine governmental action.” The statute itself provides an itemized list of what types of payments can be characterized as lawful facilitating payments, colloquially called “grease payments,” including obtaining or processing permits, licenses or other official documents; providing utility service; loading and unloading cargo; and scheduling inspections associated with contract performance or transit of goods. The list is offered by way of example, and is not exclusive, so the exception also may cover other similar payments.

However, the Department of Justice (DOJ) has taken the position that the term “routine governmental action” does not include decisions by foreign officials to award new business or continue particular business. [1]

Thus, where a U.S. company has operations in a foreign country, for example, petroleum processing operations in India, and finds it necessary to make small regular payments to local government officials in order to expedite routine imports of parts for its processing plant so that they will arrive promptly and predictably, those payments are legal under the FCPA.

Indeed, even a few millions of dollars of annual expenditures of, say, $50 each time supplies arrive at customs for import clearance technically falls within the language of the exemption, so long as the expenditures are accurately recorded and identified in the company’s books and records, pursuant to the FCPA’s accounting requirements.

Contrary treatment under the Bribery Act

In sharp contrast to the FCPA, the UK Bribery Act does not exempt facilitating payments from its prohibitions. Instead, any payments offered, promised or given to a foreign official for the purpose of influencing the foreign official in the performance of his functions as a public official, and with the intent to obtain or retain business or a business advantage, are considered illegal bribery under the Act.

The Serious Fraud Office (SFO), the UK agency charged with primary enforcement responsibility under the Bribery Act, has issued guidance taking the position that facilitating payments are illegal under the Act because bribery cannot be eradicated in the world if some bribes—even though they are small, irregular payments—are still permitted. The former director of the SFO, Richard Alderman, has also stated that permitting facilitating payments makes companies more vulnerable to demands for larger bribes and is a major contributor to the belief that bribery is a necessary part of doing business. [2]

Nonetheless, Alderman conceded that small facilitation payments are unlikely to concern the SFO unless they are part of a larger pattern. But, he stated, this approach does not mean that companies can permit a number of so-called “one-off” payments that total a large yearly amount. By definition, according to Alderman, the payments would no longer be either small or one-off and would therefore fall under the prohibitions of the Act.

Alderman also noted that the SFO has received information from commercial organizations that adoption and implementation of this policy has not made them less competitive, even in places where this form of corruption is endemic [3]—a position that many international companies would undoubtedly dispute.

Thus, the company that implements the same procedures in the above India hypothetical, if subject to the UK Bribery Act by having operations in the UK, doing business in the UK or sending money for facilitation payments through UK bank accounts, would be violating the Act. The Act provides an “adequate procedures” defense, which provides that a company making facilitation payments or otherwise violating the Act will be shielded from prosecution if it has a clear policy against making such payments that is otherwise being followed.

However, that defense, which is essentially a rogue employee defense, likely would not be available to the company in the hypothetical because of the pervasive nature of the payments and evidence that the company has condoned the practice.

FCPA treatment of gifts and hospitality

The U.S. and UK legislation take somewhat different approaches in their assessment of gifts and hospitality. Historically, the outcome has been likely to be the same under both analyses, but their treatment has a less certain future in the UK. The FCPA makes an allowance for expenditures for gifts and hospitality as an affirmative defense to the proscriptions of the Act. Giving or promising a thing of value to a foreign official or candidate is permissible where it is “a reasonable and bona fide expenditure, such as travel and lodging expenses” and it is directly related to “the promotion, demonstration or explanation of products or services” or “the execution or performance of a contract with a foreign government or agency thereof.” 15 U.S.C. § 78dd-2(c)(2).

FCPA Opinion Procedure releases by the DOJ reflect that the department will not take enforcement action where the requestor does not have any non-routine business under consideration by the relevant foreign government agency, the requestor will not select the particular officials who will travel or they will be selected based on certain qualifications, expenditures will be made to the providers of services rather than the officials, the period of travel is closely related to the event for which the officials are traveling and any gifts will be of nominal value.

On the other hand, the DOJ has taken enforcement action where gifts or hospitality have lacked these characteristics and there is evidence that they were given for the purpose of obtaining or retaining business for or with, or directing business to, any person.

Bribery Act treatment of gifts and hospitality

In order to determine whether expenditures are reasonable and proportionate hospitality, which is normal business and is to be encouraged, at least in the eyes of former Director Alderman, [4] or disguised illegal bribe payments, prosecutors assess whether the payment is “lavish or extravagant,” and whether there is evidence that the payment is to induce someone to improperly perform their duties with a view to obtaining a business advantage. A payment may be looked at as a bribe if it is related in time to some actual or anticipated business with the recipient, particularly where some form of competitive process is involved. This has been coined the “improper performance test.”

With the recent change in directors of the SFO, there has been an accompanying change in the enforcement atmosphere at the agency. The SFO was recently criticized by the Organization for Economic Cooperation and Development (OECD) in its Working Group Phase 3 Report on Implementing the OECD Anti-Bribery Convention under the Bribery Act for its practice of attempting to settle cases civilly wherever possible, and particularly in cases where a company self-reports misconduct. Director David Green, who took over the role at the end of April, has signaled that he will bring a more rigorous enforcement posture to the SFO, stating that he intends to change “the perception [that] has emerged over the last few years that perhaps there is more willingness to compromise than to prosecute.”[5]

The OECD Working Group was also critical of other SFO enforcement postures, including the practice of using what is done in the industry as the yardstick for the reasonableness and proportionality of gift and hospitality expenses. In addition, while the SFO’s advisory publication states that a company’s payment for flights and accommodations to allow foreign public officials to meet UK executives in New York, including fine dining and baseball game tickets for an official and his or her partner, would be considered proper under the Act, the OECD Working Group scorned the position and urged the SFO to reconsider its thinking.

Coupled with the stated renewed criminal enforcement focus of the agency, this new approach suggests that the SFO may be increasingly focused on pursuing, and perhaps criminally prosecuting, cases in which bribery has been committed in this manner. Thus, companies may find that they have increased risk under the UK Bribery Act than they did not long ago.